Victims of Madoff fraud can't sue SEC: appeals court

NEW YORK (Reuters) - Victims of Bernard Madoff’s investment fraud have lost their bid to sue the Securities and Exchange Commission for negligence in failing to uncover the swindler’s Ponzi scheme.

On Wednesday, a federal appeals court in New York upheld the dismissal of lawsuits against the securities regulator brought by Madoff investors. The court said the SEC’s actions and “regrettable inaction” were protected by a law that shields federal agencies from liability.

The Madoff case embarrassed the SEC, which had investigated the now-imprisoned money manager but failed to detect his fraud.

The investor lawsuits relied heavily on a 2009 report by the SEC Inspector General’s office, which outlined how the agency missed red flags and failed to follow up properly on leads that he was running a massive scam at his firm, Bernard L. Madoff Investment Securities LLC.

Howard Kleinhendler, a lawyer for eight plaintiffs who lost $50 million in Madoff’s scheme, said he could not envision a better example of a case in which the SEC should be held liable for failing to prevent a fraud.

“It just shows that we spend a lot of money on this agency, and when they screw up, they’re not accountable,” he said, adding he would seek a Supreme Court review of the case.

An SEC spokesman did not immediately respond to a request for comment.

In an unsigned opinion, a three-judge panel of the 2nd U.S. Circuit Court of Appeals expressed “sympathy for Plaintiffs’ predicament (and our antipathy for the SEC’s conduct),” but said Congress’ intent was to protect regulators’ discretionary use of their investigatory powers.

The ruling upholds an April 2011 decision by U.S. District Judge Laura Taylor Swain in Manhattan, which tossed a lawsuit brought by Madoff investors Phyllis Molchatsky and Steven Schneider.

Several similar cases by other investors that were also dismissed were consolidated for the appeal.

Howard Elisofon, a lawyer for Molchatsky and Schneider at the law firm Herrick Feinstein, said in a statement he “recognized that challenging the SEC would be difficult, but this was a case that needed to be fought.”

Separately, the 9th U.S. Circuit Court of Appeals earlier this year rejected claims against the SEC by other former Madoff clients.

Madoff pleaded guilty in March 2009 to running what prosecutors said was a $65-billion Ponzi scheme. He was sentenced to a 150-year prison sentence in June 2009.

Irving Picard, a court-appointed trustee, has said he has recovered or reached settlements for $9.32 billion for former Madoff customers.

The case is Molchatsky v. United States, 2nd U.S. Circuit Court of Appeals, No. 11-2510.

Reporting by Nate Raymond in New York; Editing by Martha Graybow, Alden Bentley and Bernadette Baum